Business | Tomans in Turmoil, Gold Gone Wild

by ALI CHENAR in Tehran

[ dispatch ] The first sign of trouble appeared in the gold market. There has always been a strong demand for gold and gold coinage in Iran, as Iranians have traditionally saved in the precious metal. "I never lose money buying gold," said Simin, a 50-year-old retired teacher and mother of four grown children. "Even during the war, I registered for Bahar-e Azadi coins [the Islamic Republic's official gold coins]. They are easy to hide and easy to trade. When I need cash, all I need to do is go into the first jewelry store and sell them at market price." Few became alarmed as gold prices began to increase in Tehran; after all, the gold market was on the upswing globally. According to an economist at the Central Bank of Iran (CBI), "Gold was rising everywhere, and it was only natural to see prices increasing in Tehran. Although sometimes the price of gold in Tehran was more expensive than its price in the global market, sometimes it was lower."

But as the price of gold continued to climb, many more started to invest in it. Laleh, a 32-year-old artist and designer, was one. "I used most of my savings to buy gold in the summer of 2010," she said. "Since then, it has gained almost 50 percent in value." That sort of return, which few investments can hope to offer, triggered even greater demand. As demand shot up, the CBI tried to stem it. Central Bank President Mahmoud Bahmani announced on several occasions that there was enough gold for everyone. These proclamations seemed only to fan the flames. Finally, last May, the CBI announced that it would sell no more than five Bahar-e Azadi coins to each citizen; the transaction would be noted in their national ID cards. This too failed to restrain the market, and prices kept rising. People began to queue in long lines to purchase their five coins. Entrepreneurial types were on the scene too, hiring others to stand in line for them. "Renting someone," as the practice came to be called, became very common and the term entered everyday parlance.

At one point this past December, Khabar Online, a news website associated with economic conservatives, reported, "The price for one's place in the line is up to 40,000 tomans" -- 400,000 rials, or $35 at the time. Banks currently sell each gold piece at 60,000 tomans below market price. "One can make up to 300,000 tomans by staying awake and standing in line for the whole night," Noosha, an accounting major, told me. "See, it is easy to make money. Who needs a job in this country?" She said that she and her mother had made about three million tomans in this fashion.

But it had its dangers. "When the bank employees tried to close the doors, yelling 'tamoom shod' [sold out], people would yell back 'na, nashodeh' [no, it's not]. Then the people closest to the door would start to fight and beat each other up," she said, describing the tense atmosphere. There were stories of people getting stabbed in these quarrels.

Some economists suggested that the government should sell gold certificates to calm the market. Right before Christmas, the CBI announced that it would offer gold prepurchase certificates for sale, hoping it would quell the public hunger. But again the announcement did little to stabilize the market.

"People trust the real thing, not the promise of it," explained Mohammad, an economic analyst with a private bank in Tehran. "Paper [documents] and certificates do not do well in Iran -- the market is too volatile. Plus, ordinary people are not very familiar with papers and bonds. So they prefer to have the real thing." Besides, people in Iran do not trust government promissory scrip. Of course, CBI gold certificates are being purchased on the market, but still the price of gold keeps rising.

For now at least, the government is more concerned with another market: hard currency.

To understand Iran's currency exchange market, one must recall what the Iranian economy was like in the 1980s. For a decade, the Iranian government kept the official exchange rate for the U.S. dollar at 10 percent of its black market value. Many government agencies sold their allocated dollars on the streets of Tehran to make ends meet. According to Mohammad, the bank analyst, "In the '80s, Iranian households learned how to find ways to benefit from the opportunities created by the government's meddling in the market and its subsidies." At one point during the following decade, Iran had three different official dollar exchange rates: one for industries, one for tourists, and one for government agencies. It was no small achievement when the administration of President Akbar Hashemi Rafsanjani was able to introduce a single exchange rate for the dollar. This policy was upheld under Mohammad Khatami.

Khatami's successor, Mahmoud Ahmadinejad, wanted to maintain a fixed exchange rate, however, so this single-rate regime became untenable. As early as 2010, Iranian economists warned about the growing gap between the government's official exchange rate and the dollar's true market value, and the consequent profit-making opportunities. Still, the growing demand for hard currency did not destabilize the market for a time. This eventually changed in response to political developments.

As the United States led its allies in an effort to curb the Islamic Republic's nuclear ambitions, the Iranian economy came under siege from increasingly severe sanctions. The targeting of its oil industry has restricted its market, and the country now often receives commodities instead of hard currency in return for the oil it sells. Banking sanctions have drastically complicated many international financial transactions; their cost has soared and many Iranian businesses have been forced to use third parties to transfer money.

"Emirate banks started to tell us they cannot open accounts or lines of credit for us Iranian businesses," said Mehdi, who operates an export-import office out of Dubai. "This has made us miserable, since we can't send funds to either our partners in Iran or abroad." And that was just the beginning. As regulations continued to tighten, Mehdi and his colleagues grew ever more fearful of the day they would find their accounts shut down all together. His company reduced its dealings with Iran and sought less risky opportunities elsewhere. The supply of paper money began to decline in Tehran shortly after sanctions were imposed on Iran's banking sector, with a domino effect on Iranian consumers.

Muhammad said, "There is always a strong demand for paper money in Iran; it is caused by demand for foreign travel and imported products, as well as household demand for savings in hard currency." Any shortage of paper money in the market can trigger a spike in the exchange rate, and this is exactly what happened. As the market became more aware of the shortage of paper money and the growing force behind the sanctions, average Iranians started to realize something: "The dollar's real value is much more than its nominal value," in Muhammad's words.

Many began to purchase dollars through official channels with the intention of selling them on the streets of Tehran to make some extra income. Some spirited individuals gather passports and purchase tickets for the passport holders from travel agencies so they can collect their allocated dollars at the official price. Mina, a saleswoman at a Tehran travel agency, has seen many such transactions. "One day a gentleman came in to buy 40 tickets for a Tehran-Yerevan flight, and then he came back three days before the flight to cancel them all. He paid a cancellation fee for each. Still, he made a good profit collecting those passengers' allocated dollars." Mina's observation is not unique. Iranian consumers have long learned to take advantage of such opportunities to make ends meet.

As more people turned to the exchange market for speculation purposes, the sanctions further reduced the supply of paper money. The CBI had to prioritize and the government set allowances for individuals with different needs: $500 for foreign ground travel, $2,000 for foreign air travel, up to $12,500 per semester for Iranians studying abroad. Hamed, a student who came to Tehran for his Christmas holiday, spent most of his time standing in lines in front of the Ministry of Higher Education. "I do not need the cash, since I have an assistantship, but I can receive my tuition at the government rate. Down the street they give me 30 percent more than what I have to pay the ministry in rials. It is good business!" I asked him about the ethics of what he was doing. "Are you kidding?" he exclaimed. "Everybody goes for it. Why should I bother when the government has approved this?"

Good business, indeed, still it seems that speculators have maneuvered the government into a corner. Just this week, the CBI reduced the foreign air travel allowance to $1,000. And Bank Mellat has stopped selling dollars to students. The imposition of sanctions on the CBI roiled the market. The exchange rate skyrocketed to 1,800 tomans (18,000 rials) per dollar. "That was a shock," says the CBI economist. "The market could stabilize around 15,000 rials per dollar. The problem is our prospects do not look too good and the market knows this." There is little doubt that the currency exchange market will remain volatile.

What does this means for Iranian businesses? Yasser, who sells electronics, cellphones, and computer parts in central Tehran, knows that the days ahead will be difficult. "We rely on imports, and imports are going to be costly.... An increase in the value of the dollar always signals an increase in the cost of household items. We rely on imports for everything: food, technical parts, and clothing." He predicts, "All prices will go up in a few months, maybe sooner. Then people will be frustrated and under even heavier pressure than before to make ends meet." Who can blame Tehran housewives for buying gold and dollars? They know that they might soon have to sell them to put bread on the table.

The government has been subjected to heavy criticism for these developments. The Majles summoned Ahmadinejad and some deputies have asked for the CBI president's resignation. Ahmadinejad has told angry legislators, "Honestly, our economy is doing fine." It seems he is the only one who thinks so. He has to act so, at least, what with the upcoming parliamentary elections. His hardline rivals will not hesitate to blame him for the country's economic woes. The stakes for average Iranians are high as it is, but for Ahmadinejad this might be the last battle.

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